I was recently interviewed by Innovate 1st for an upcoming edition of Innovate eZine’s “Conversations on the Cutting Edge” series. Following are excerpts from the interview, which was conducted by Doug Berger, Managing Director, The INNOVATE Company.

Social Media Myths & Truths

Doug: Let’s shift gears to social and digital media. Why don’t you start with some basic facts and then move into some of the wide-spread fallacies.

Randall: Globally, in 2007, there were about 210 million people using social media. Today, it’s over 500 million people. The time per person spent between 2007 and 2009 has gone up about 82 percent.

So more people are doing it, and they’re doing it a lot more. Secondly, it is big everywhere. When you look around the world at the percentage of people using social media, globally it’s 73 percent as of last year, from a low of 59 percent in Germany up to a high of 84 percent in Brazil, with the U.S. at the global average of 73 percent.

It started skewing a bit younger, but as the penetration of social media has grown, it’s become almost a truly representational population.

Social Media Myths & Truths

Doug: What are the trends around social media in terms of brand building?

Randall: We all know that a recommendation from a friend, or a family member, or an acquaintance is the most powerful form of marketing there is. That is the underlying phenomena of social media. Engaging people to ultimately have them speak positively on your behalf is the real opportunity of social media.

Let me just give you one example of this. Nielsen (Disclosure: I work at Nielsen) has a partnership with Facebook, where they measure ad effectiveness on Facebook. They have looked at a basic ad for Virgin Atlantic and we can see the recall for the ad. Facebook can serve up that same exact Virgin ad, except below its ad it says, “The following friends or people in your network are also fans of Virgin.” These ads score much higher than just the regular ad without the social context.

Virgin Atlantic: Facebook Fan Page

One of the developments that advertisers need to be focused on are ways to leverage social context that validates having people seriously think about using or buying your brand.

A lot of our clients are moving to a media model that we like to call POEM – Paid, Owned, Earned Media. Paid media is the traditional advertising. Owned media is your own website, or you own your own content on a website. Earned media is how consumers are talking about your brand.

This POEM framework is an interesting one to think about for reaching consumers. Now advertisers can look at people who viewed an ad; the percentage who went online and searched for my brand; the percentage who went onto my Facebook page; the percentage who went to my corporate website. You can measure all of that. You can start to understand the interaction of paid and earned media in a way that hasn’t been possible before.

POEM Framework: Paid, Owned, Earned Media

Doug: In the world of social media, there are myths that companies are acting on, but based on your statistics don’t have validity. What are turning out to be some of the places where social media is not delivering marketing effectiveness?

Randall: Social media is part of earned media messaging that’s carried out voluntarily by consumers on behalf of the brand. That voluntary messaging can be positive or negative.

The biggest myth is in viral marketing. There is a belief that you can do a viral video and achieve much of what you would achieve, for example, with TV advertising at a fraction of the cost.

The reality is, first of all, that there are a rare few videos that ever go viral enough and get enough voluntary messaging by consumers to come anywhere close to the reach you can achieve on TV. It really has to be earned through consumers giving you great ratings because your brand really worked; the product or service is a great one.

Old Spice & Viral Marketing

I remember a time when my wife and I went on vacation. We came back to the Philadelphia Airport and her Lexus wouldn’t start. I called customer service and I expected that they would send a tow truck. Instead, they walked me through a five-step process to get the car started and it all worked out.

That’s a fantastic example of where I could then go online and talk about my great experience with Lexus. That is what advertisers need to be focused on … how do you drive voluntary positive messaging by consumers on behalf of your brand?

People have gotten hung up on going after something really cool and creative and different and having it go viral, as opposed to focusing on the real activities that build advocacy for your brand.

Doug: What else have you found people to be really interested in?

Randall: Let me come back to cross platform measurement. You know that the cross platform exposure is driving much greater effectiveness among the people who see your ad in more places, and yet the media planning hasn’t caught up.

The media plans are still constructed in a way that drive more reach across each media instead of driving more overlap. This area is going to get more attention.

What were some of the predictions from the group on the impact of web 2.0 on the future of Marketing?

Marketing — More Real Time and More ROI

Marketing Will Become More “Real Time” — My prediction focused on a seismic shift in Marketing, with marketers beginning to view social networks as a significant marketing contact point with broad implications for how marketing is managed and measured. Dri­ven by dig­i­tal and Web 2.0, Mar­ket­ing will increasingly move from an annual marketing planning exercise focused on one-way communication, to a real-time, dynamically planned function focused on interacting with and responding to consumers in real-time. Mar­ket­ing effec­tive­ness will increas­ingly be mea­sured in real-time, and adjust­ments will be made “on the fly,” based on brand equity and ROI met­rics.

“Earned Media” Will Become MoreMeasurable — And More Relatable to Paid Media — The “greater focus for most com­pa­nies will be on demand creation through use of social media & Web 2.0 tech­nolo­gies,” according to Rob Peters. Marketers will increasingly focus on the creation of “Earned Media,” and will build their measurement capabilities to better understand factors of success. As well, Marketers will increasingly think of media in a more holistic “Blended Media” framework, e.g. the mix of traditional paid TV, Web, etc. and earned media such as Twitter, blogs, organic search and such. This is important since TV viewership continues to increase, and TV advertising seems to work about as well as ever. Understanding the relationship and interaction of paid and earned media will continue to evolve and become more sophisticated in 2010.

Social Networks Will Become Increasingly…

More Able to Drive Relationship Marketing —Christopher Rollyson affirmed the increasingly important role of global social networks in “discovering, building and maintaining relationships.” Network theory shows that the more people who are in a network, the more powerful it becomes for all members. As social networks continue to grow and combine in new forms, this network effect will only increase the potential impact of social networks. And continued social media technical innovation will accelerate brands ability to build new and more interactive relationships with their customers.

More Cost Effective — On the topic of the growth of social networks, Suzy Tonini points out that Web 2.0’s “reach and cost-effectiveness have been a huge plus”in the midst of the recession. While not free, social media will continue to offer the potential to drive improved results at lower cost. The key will be for brands to understand what aspects of earned and paid media drive word-of-mouth, viral marketing and create a long tail of positive brand impressions on the web that continue to build the brand long after the initial effort is finished.

More Mobile with Greater Ability to Share Trust Based Information — Recommendations from people you know is consistently rated by consumers as a top marketing contact point. The continued adoption of Facebook Connect will drive this to a new level as consumers can increasingly log in to their favorite sites with their Facebook ID, and then access their social networks opinions and recommendations as they traverse the web.

More Location Aware — Alvin Chin poses that “location-aware” geo-social networks will allow the recording of “social interactions in real life.” This will allow Marketers to increasingly “map” consumer engagement by geographic location, serve up relevant content, and interact in novel and interesting ways.

Geo-Social Networks Take Twitter and Facebook to the Next Level

Will the Predictions Become Realities in 2010?

Not every prediction comes true. Social media pundits predicted the death of TV and there’s just no evidence yet that it’s dying. That said, there’s no question that web 2.0 and social media will only expand in 2010.

Any marketer who questions the likelihood that these predictions about information sharing, the expansion of social networks, and brand building should consider the advent of Google Buzz. With the ability to share status updates to selected groups, interact with others via location-based software, and find answers via mobile search engines, Google Buzz takes the offerings of social media players like Facebook, Twitter, and Foursquare to the next level. And that’s one digital phenomena that started out as a prediction.

This is the 5th in a series of periodic guest posts. Catherine Davis is a marketing executive with extensive experience at Diaego, Harris Direct Online, Morgan Stanley, Discover Card, and Leo Burnett.

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Do traditional marketing rules apply to Social Media ? Just before the holidays, I attended the CMO Club Summit in San Francisco, where the topic of discussion quickly turned to social media. Industry experts from Guy Kawasaki to Hewlett Packard’s Michael Mendenhall weighed in on whether marketers should incorporate social media as part of their overall strategy.

Our conclusion? While social media marketing is driven by unique characteristics, the marketing evaluation process follows that of traditional media planning.

When embarking on a social media marketing plan, marketers must consider the following points:

1. Social Media Marketing is Particularly Well-Suited to Building Brand Affinity

Estee Lauder created a powerful and actionable social media marketing campaign, where they encouraged women to try new products and have a makeover done at department store locations. Sounds ordinary? Well, post-makeover these women were photographed — and the photo was uploaded to the social networking site of their choice.

Estee Lauder: Social Media Marketing to Women

There are fewer examples of social media driving sales. Dell is probably the best known example. Reuters reported that Dell attributes more than $3 million in sales to Twitter, where the company has 600,000 followers. Considering these figures as a sole output of viral marketing, it is clear that Dell will continue to make headway with its integrated social media program.

2. Understanding Your Target and Whether They Actively Participate in Online Social Networks are Equally Important

One of the best examples of understanding the target consumer comes from Sears.com. The online retailer created a website for teenage girls called “Prom Premiere.” On the site, girls are encouraged to use Facebook applications and email to share photos of prom dresses with family and friends. This initiative demonstrates a concrete understanding of the target audience, as well as the purchase decision process for prom dresses.

Sears: Prom Dress Sharing via Facebook

3. Social Media Campaigns Require Scalability and Measurement

How do brands develop scalable initiatives? Take Nike’s “Nike Human Race,” which leveraged Nike’s legacy of sponsoring local races and supporting running training programs. By rallying an international community of devoted athletes, Nike converted 40% of previous non-consumers after only one year, and had 800,000 runners participate in the 2008 race.

The “Nike Human Race” is clearly scalable and impactful in long-term brand building. The next level of scalability is understanding how the program translates into sales. Digital campaigns are more easily measurable, more timely, and therefore more usable in a yield management model. Put in place precise metrics to measure the marketing ROI on your social media initiative.

4. Make Sure There is a Strong Strategic Link to Your Product or Brand

Estee Lauder’s program works because their makeover inspires confidence in the picture a woman posts on LinkedIn or Match.com. Sears Prom Premiere made it interactive and fun to choose just the right dress for prom. Each brand offered a product that was part of the solution and that made it ownable.

What’s the Bottom Line in Social Media Marketing ?

Social media can be an incredibly creative way to engage your customers and help define your brand. If you haven’t done a social media campaign yet, begin monitoring any large or influential communities where your products or your competitors are frequent topics of conversation. Identify the role your brand plays in their lives and how you can add value.

Evaluate your in-house assets –many companies have a wealth of information that can be used to create and syndicate content on highly trafficked sites. Start small and create a test and learn environment. You will quickly learn what works and should be scaled up. If you are already actively involved in social media, take a step back and evaluate your program. It needs to be assessed on it’s own merit and against the channels it is replacing. It should be just one part of a fully integrated marketing program.

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Catherine Davis was most recently SVP Marketing at Diageo, the world’s largest alcoholic beverage company including Johnnie Walker, Guinness, and Smirnoff. She is a marketing executive who builds brands and creates new media and marketing models to drive business growth. Catherine is experienced in CPG, financial services, and online businesses and has demonstrated leadership across all marketing functions, including digital.

In what context do viral marketing strategies work? How do on-line product recommendations develop, multiply, spread and ultimately, dwindle and die? And, can Marketers influence any of this?

These were important questions posed by Leskovec, Adamic, and Huberman in their 2008 study “The Dynamics of Viral Marketing.” This is one of the few studies I’ve seen to actually study how on-line recommendations grow virally and how this growth impacts purchase behavior throughout the viral network.

Viral Marketing -- When and Where Does it Work?

Admittedly, the study had limitations, notably that it was only four categories, just measured on-line viral activity, and included a discount incentive to help motivate purchase. But, even with these limitations, it uncovered deeper insights into the systematic patterns in knowledge sharing and persuasion online—all of which are of high interest to Marketers.

What Did the Study Entail?

Lescovec et al. examined an online recommendation network composed of 4 million people who made 16 million recommendations for 0.5 million products. Each time a consumer purchased a book, music, or movie, he or she could send e-mails recommending the item to friends. The first person to purchase the same item through a referral link received a 10% discount.

What was Measured

When and at what price a product was purchased

If the product was recommended to others

Whether the recommendation resulted in a subsequent purchase and discount

They then modeled the effectiveness of recommendations as a function of the total number of previously exchanged recommendations.

Recommendation Networks Grow Slowly Over Time.

Important Viral Network Learnings & Insights

Finding #1: Consumers recommended a large number of products to the same group of people. As a result, recommendation networks became heavily locally-based. For example, in the DVD recommendation network there are 182,000 pairs that exchanged more than 10 recommendations.

Consumers Tend to Recommend Products to the Same People

Finding #2: Recommendation networks centered on a specific product category. That is, the people tended to focus on recommending a particular product category and thus created a “community of interest.” Having said this, most all networks shared recommendations for all types of products.

Finding #3: Trust, influence, and perception of “spam” affected purchase. As people exchanged more recommendations, the likelihood they would purchase the product increased due to a growing foundation of trust. However, purchase likelihood increased, peaked, and then fell as consumers received additional recommendations for a specific product. A few recommendations built credibility; too many appeared as “spam.”

Finding#4: Most recommendation chains didn’t grow very large. In fact, most terminated with the initial product purchase, and even the largest connected networks were very small as a percentage of the total population.

Recommendation Chains Don’t Typically Grow Very Large

Finding #5: 20% of recommendations accounted for 50% of sales. This is not far from the usual 80-20 rule, where the top 20% of products account for 80% of sales.

What are the ‘Viral’ Implications for Marketers?

1.Identify the “Amplifiers.” Given that 20% of recommendations generate 50% of sales, it’s key to figure out whom the amplifiers are and focus your efforts on them.

2. Determine Where the “Amplifiers” Congregate. Where do they exchange product information? On what platforms do they consume media? Web behavior can be linked to off-line purchase panels to quantify the effectiveness of recommendations (see “What Really Drives Web Advertising ROI”).

3. Take Online Recommendation Networks to the next level Through Social Media Marketing. Marketers should explore development of models to measure recommendation systems on Twitter, Facebook, Foursquare, and the larger online arena. Through broader web 2.0 outreach, marketers can quantify consumer engagement on recommendation networks by volume, reach, tone, and source.

Viral Marketing: Limitations…

What’s not yet so clear from the research is how to minimize transmission “breakdown” – e.g. how do you minimize the likelihood that a product recommendation is the last one. As the research showed, most viral networks don’t grow very large. Marketers will only invest significant money if they can truly scale viral marketing programs.

…And Future Opportunities

With the right tools and metrics, marketers can diversify their marketing plans to incorporate viral marketing strategies. The research clearly shows that viral marketing can build unique and niche recommendation networks, bolster consumer engagement, and lift sales.

And as consumers continue to favor a digitally-based, social network-centricworld, it’s critical that Marketers become more expert at viral marketing. Key to this will be identifying amplifiers, focusing on congregation points, leveraging social media opportunities—all without overdoing it. As importantly, Marketers must discover new approaches to spread and scale viral marketing just as effectively as the flu seems to proliferate every flu season.

It’s common knowledge that word of mouth (WOM) by people you know is the most effective advertising. Research corroborates this:

Word of Mouth — High Impact But Low Spending: Why ?

Yet, most Marketing organizations don’t behave as if it’s very important. According to PQ Media, 2008 WOM spending was $1.7B, +10% over the previous year. Estimated U.S. Marketing spending ranges from ~$500B all the way up to $1 trillion; WOM represents only 2-4% of total spend. So, why the impact vs. spending disparity ? The answer, I think, is two-fold:

Word of mouth remains a black box for most Marketers — it’s really hard to figure out and even harder to do well.

It hasn’t been easily scalable–either within a persons social network or beyond.

Word of Mouth vs. Viral Marketing

Some people differentiate between WOM and viral. WOM is described as one to few, viral as one to many; as well, viral includes sharing and resharing–usually via the web. I think this distinction is largely false as WOM can become viral–e.g. the recent United Airlines guitar video (4.9M views).

Word Of Mouth Marketing

WOM should build your brand. The mainstream media love to report on highly creative viral videos–e.g. the T-Mobile sing-a-long in Trafalgar Square, etc. These videos do generate incredible amounts of viewing, but are they really building the brand ? Do they engage consumers to better understand how and why the brand is better than alternatives ?

Word Of Mouth — More Scalable in Two Directions

WOM is changing as the web enables two simultaneous phenomenon:

Vertical Scalability — The web continues to enable new ways for consumers to share information both within their social circle and beyond. Sharing opinions and ideas through blogs, Twitter, YouTube, Social Networking sites, etc. has vastly increased the scalability of WOM, as one person can now reach most people within their social network instantly and of course, people well beyond.

Horizontal Scalability — The rise of social networks and OpenID, Facebook Connect and similar services will enable personal network portability. This means that friends and families–and their opinions–will be able to flow with consumers as they traverse the web and interact with products and services. So, WOM from your social network will now become available in places it wasn’t before.

Basic Elements of Word of Mouth

Given the rising importance of WOM, how can you harness this powerful opportunity for your brand ?

1) Define Who’s Talking — Within your brand users, there’s almost always a group of 10-15% of users who are “amplifiers.” These consumers have unusually large social networks and form part of their self-identity from sharing new information with friends and family. Similarly, there are important non-users who need to be identified as well — bloggers, heavy Twitter users, etc. who can disproportionately impact your brand.

2) Define What They’re Talking About — Amplifiers don’t just randomly talk about your brand. In fact, they tend not to talk about your core mainstream messaging. Why ? Because everyone already knows about it; they get no psychic reward because there’s nothing new. They tend to talk about and share things that are important to them and also new and surprising about your brand–positively or negatively. Conduct research among amplifiers to understand the main themes they are talking about.

3) Determine Which Mediums They’re Using — Where are amplifiers talking about or sharing your brand ? Off-line in casual conversations ? On-line via Facebook ? Understanding which mediums amplifiers are using to talk about your brand gives you insight into how to facilitate or enable these conversations. Do research to find out.

4) Understand What Receivers Are Doing Next — Understanding receivers is just as important as understanding amplifiers. Without a receiver there’s no WOM. Most important is to understand what receivers do after hearing a theme. Do they visit the store ? Search on line ? Visit the web site ? Consult another friend ? Share via Twitter ?

5) Test and Qualify WOM Stimuli — If we know who is sharing, what they’re talking about, in which channels, and what receivers are doing after the conversation, then what ? Using WOM themes, develop a range of stimuli — e.g. customer experience “moments of truth,” white paper/special user content, tips/how-to’s, personalized web micro-sites, etc. to help drive accelerated word of mouth. Run a small test versus control. Did you get more people to talk or share your stimuli ? What did listeners do afterwards ? Did you build your brand equities ? Increase consideration and purchase of your brand ? Which stimuli worked best ?

WOM is hard work. Like most Marketing, it starts with really understanding your consumer. But the consumer understanding work is not well understood. And WOM is even harder to drive in a systematic and disciplined way. As WOM becomes more important, it becomes increasingly important for Marketing organizations to increase their WOM capabilities and most have a long way to go. What’s your Marketing organizations WOM IQ ?